India’s Rajan Sees Risk of New Crisis on Loose Monetary Policies

Aug. 7 (Bloomberg) -- The world is at risk of another
financial crisis as monetary stimulus in developed economies
encourages investors to take risks and boost asset prices,
Reserve Bank of India Governor Raghuram Rajan said in two
interviews.

“We are taking a greater chance of having another crash at
a time when the world is less capable of bearing the cost,”
Rajan told the Central Banking Journal. Global monetary
authorities must coordinate more closely and create a safety net
to protect developing countries and avoid a “merry-go-round”
of perpetual crisis, he told U.K. newspaper The Times.

Rajan has been a vocal critic of developed nations’
monetary policies and their impact on the rest of the world. The
former International Monetary Fund chief economist said the
world hasn’t learned its lesson from the credit crisis and
criticised the use of quantitative easing and other “extreme
monetary actions,” according to The Times.

Investors are counting on “easy money” being available
for the foreseeable future and thinking they can sell before
everyone else does, he was quoted as saying by the Central
Banking Journal.

“They put the trades on even though they know what will
happen as everyone attempts to exit positions at the same
time,” he said. “There will be major market volatility if that
occurs.”

Rajan said the problems arising “are not so much from
credit growth, which is relatively tepid in the industrial
markets and has been much stronger in emerging markets, but from
asset prices due to financial risk-taking,” the Journal
reported.